FOMC confident, RBA to cut with RBNZ stuck in neutral

More confident in the US economic recovery despite lower inflation expectations with a closer eye being kept on developments from offshore. That was the overriding theme to come from the US FOMC’s monetary policy statement released earlier this morning with the committee upgrading their assessment on the domestic economy while at the same time acknowledging market-based inflation measures have fallen further. In January the statement described economic activity as having ‘expanded at a solid pace’, an improvement on the ‘moderate’ pace seen in December, with job gains now being viewed as ‘strong’ as compared to ‘solid’ as seen previously. Reflecting lower gasoline prices the committee acknowledged that ‘inflation (had) declined further, largely reflecting declines in energy prices’ with ‘market-based measures of inflation compensation (having) declined substantially in recent months.’ Despite this the committee noted that ‘recent declines in energy prices have boosted household purchasing power’, something that while correct was not seen in December when retail sales plunged 0.9%. On the all-important subject of the timing for policy normalisation the committee dropped their pledge to maintain steady policy for a ‘considerable time’, something that was viewed as a signal that policy tightening wouldn’t occur for at least 6 months although, as was the case in December, they stated that they can be ‘patient’ in this process. In a sign that they are now paying greater attention to events offshore, when evaluation when to begin policy normalisation, the assessment ‘will take into account a wide range of information, including measures of labour market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments’.

So what to make of it all? To be frank I’m still trying to get my head around it myself. On one hand they’re becoming more confident in the economic recovery, something that has seen them upgrade their views and drop their pledge to keep policy unchanged for a considerable period, while at the same time acknowledging disinflationary pressures are accelerating rather than moving back towards their mandated target. It all seems a bit messy to me. Was it dovish or hawkish? In reality it’s the latter although, whether reflective of flows from other asset classes or just a general distrust in decision-making from the Fed, it was interesting to see US treasuries and Eurodollars bid, something that you wouldn’t expect to see on a hawkish shift, in the period following the its release.

‘AFTER 18 months of keeping its official interest rate unchanged, the Reserve Bank will almost certainly cut the rate at its first meeting back for the year next Tuesday’. That’s the view of noted RBA-watcher Terry McCrann who, in an opinion piece released overnight, stated that downgrades to GDP and CPI forecasts in the upcoming statement on monetary policy will lead the RBA to reduce the cash rate by 25bps to 2.25% in February. He notes that the Board are now looking at a ‘series of rate cuts — at least two 25-pointers, perhaps as many as four — as not just likely but all-but as inevitable through 2015’. While McCrann has not had the best track record for predicting rate moves in recent years the reasoning behind the call seems to be incredibly specific, almost dictated. Have the RBA had a word in his ear to help soften up the market? While nothing is certain when it comes to Central Banks, just look at recent policy decisions from the SNB, BoC and MAS, the piece sparked an immediate market reaction with the AUD offered and debt futures bid in the immediate period following its release.

As expected the Reserve Bank of New Zealand held interest rate steady at 3.50% at their January policy meeting. In the accompanying statement released alongside the rate decision the Board noted that ‘in the current circumstances we expect to keep (rates) on hold for some time’ with ‘future interest rate adjustments, either up or down, (dependent) on the emerging flow of economic data’. This was in stark contrast to what was conveyed in December when they stated ‘some further increase in (rates) is expected to be required at a later stage’.

US mortgage applications fell fractionally last week following two enormous gains with the MBA mortgage market index slipping 3.2%. Both refinancing (-5.1%) and new loans (-0.1%) fell during the week as the average 30-year mortgage rate rose 3bps to 3.83%.

German consumer confidence rose strongly heading into February with the forward-looking GfK consumer climate index rising to 9.3. The reading, above the 9.0 level of January and expectations for an increase to 9.1, was the highest level seen since November 2001. All three survey components improved during the month with the ‘willingness to buy’ and ‘income expectations’ measures both benefitting from higher disposable incomes thanks to lower energy prices. While German confidence was near-euphoric it was a different story for their neighbours to the west with French consumer confidence holding steady at 90 in January. The reading was below expectations for an increase to 91.0 with the recent terrorist attacks in Paris, along with subdued labour market conditions, sighted as possible reasons behind the subdued consumer outlook.

Helping explain the boost in consumer morale German import prices continued to decline in December with a fall of 1.7% reported. The reading, the sharpest month-on-month decline since December 2008, was below the 0.8% decline of November and expectations for a drop of 1.5% and left the annual change in prices at -3.7%, a level not seen since November 2009. As you would expect given the fall in crude oil prices ex-oil were flat on month with the annual rate coming in at +0.1%.

The Day Ahead (AEDT)

The ASX 200 looks set to snap its winning streak today with SPI futures pointing to a decline of 65pts on the open. With expectations for a rate cut from the RBA next week growing, futures now put the odds of a 25bps cut at 47%, it will be interesting to see whether the higher-yielding plays such as financials, telcos and consumer discretionary will continue to attract bids or succumb to selling pressure.

The AUDUSD has been trashed overnight, firstly on the back of the McCrann article, secondly following the release of the FOMC policy statement, with the pair falling from above .8000 to its current level of .7886. With the USD marching higher and AUD under pressure, it’s likely that any attempt to squeeze the pair higher today will be inundated by selling pressure. Bids are found at .7880 and .7855, offers at .7900, .7940 and again at .7980.

Australian Q4 terms of trade will be released this morning at 11.30am. Elsewhere in the region we’ll also receive New Zealand trade data for December.

Economic data releases this evening include initial jobless claims and pending home sales from the States, unemployment and CPI figures from Germany, the Nationwide house price index and retail turnover from the UK, the latest business climate index from the Eurozone, Spanish retail sales along with business and consumer confidence from Italy.